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Alt Lending Booms for Small Businesses, But Watch for Booby Traps

Written by: MainStreet07/23/13 - 1:55 PM EDT

By Ross Kenneth Urken

NEW YORK (MainStreet) -- Mike Cordero, owner and chef at A-Town Bar & Grill in Arlington, Virg., faced challenges in the wake of the Great Recession to secure the funding from a national bank he needed as working capital to renovate his gastro-pub.

It wasn't his fault--what with his solid credit score and established business reputation. But in the post-crisis environment, traditional lending has frozen up. Though there are some indications of thaw, traditional banks are reluctant to invest with small business, a pursuit they view as risky.

In fact as of March 31, small-business loans from banks dipped 18% to $584 billion from a $713 billion high in 2008, according to the Federal Deposit Insurance Corp.

That's where a tale of two markets emerges: banks who lend to companies with a substantial profile and alt lenders, such as RapidAdvance, who appeal to Cordero and others like him--a more expansive, eclectic group. Sure, there's much buzz about the rise of crowd-funding to secure financing, but much of those efforts target true start-ups. What about already established small businesses looking to refurbish or open up a second or third location?

It's for this scenario that the alternative lending space is growing at a rapid clip as traditional banks pair with these platforms.

"Traditional lenders like the banks are recognizing the value in partnering with alternative lenders to service the small business customers who bank with them," said RapidAdvance CEO Jeremy Brown. "They recognize having the ability to utilize lenders with alternative underwriting criteria enables them to access financing for their clients that may not fit their traditional criteria--enhancing the overall relationship with the customer."

In fact, the Green Sheet appraises the current market for merchant cash advances at between $500 and $700 million, with the potential to reach a robust $4 to $5 billion in the ensuing few years.

Another key development has been the rise of aggregators/feeders who offer match.com-like marketplaces that serve to funnel business referrals to lending sources have added alternative lenders as a key component to better serve the small business community.